Aug. 20 (Bloomberg) -- CME Group Inc., owner of the world’s
biggest futures exchange, plans a derivatives market in London
by the middle of 2013, setting up in competition with Eurex and
Liffe, the largest venues.

CME will start with currency futures for all of the G-7
nations, Phupinder Gill, the company’s chief executive officer
said in an interview today. The new exchange, to be called CME
Europe, will be led by Robert Ray as chief executive officer.
CME Globex will be the electronic trading system for the new
London exchange and CME Clearing Europe will process the
transactions. Chicago-based CME plans to file with the U.K.
securities regulator this week as the first step in the process.

Ten years after going public, CME Group has become the most
valuable exchange operator in the world, capitalizing on the
higher profitability of derivatives while the value of equity
trading has declined. The company controls 98 percent of the
U.S. futures market and gets more than 20 percent of its
business outside U.S. trading hours. It opened a London-based
clearinghouse, CME Clearing Europe, last year.

“CME is looking to expand globally at a time when the
over-the-counter derivatives markets are seeing considerable
reform” via new U.S. and European regulations, Richard Perrott,
exchange analyst at Berenberg Bank, said today. “Expanding into
Europe ahead of these changes makes sense given that close to
half of global OTC activity occurs in London.”

The new exchange represents competition for Liffe and
Eurex, whose owners, NYSE Euronext and Deutsche Boerse AG, had
their plan to merge blocked by European antitrust authorities in
February.

Merger Delay

CME has been working on the project for about two years. It
was delayed while NYSE Euronext and Deutsche Boerse held merger
talks, according to people familiar with the situation who also
revealed plans for the new exchange. Regulators scrutinizing the
NYSE-Deutsche Boerse deal were focused on whether sufficient
competition in derivatives existed in Europe and whether CME
might become “a significant player” there.

CME was also sidetracked by the bidding war for the London
Metal Exchange because acquiring the venue would have given it a
European exchange to build on, the people said. As CME was
unsuccessful in its LME bid, it decided to forge ahead with the
project, the people said.

Regulatory Environment

“It’s not the regulatory environment for ourselves, but
the regulatory environment for our clients,” Gill said today in
an interview. “There are particular clients that are
comfortable doing business in one jurisdiction,” he added.

“We have the deepest liquidity pool with about $140
billion traded a day in notional FX,” Gill said. “And we have
a potential client base that don’t trade it for various reasons.
We are doing it to meet their needs and we are wanted to have an
initial focus.”

The exchange expects it to take about six months to gain
approval from the U.K.’s Financial Services Authority, he said.

During the year it spent fighting for its deal, NYSE argued
that its greatest competitor in derivatives is CME, not Deutsche
Boerse. It cited an 89 percent membership overlap between CME
and Liffe and rivalry in trading Euribor and Eurodollar futures.
CME last year offered Euribor futures and options on its
electronic trading platform, pitting itself directly against
Liffe, which dominates the market for co-called short-term
interest rate products.

“Would we invest in a new exchange based in Europe?”
Andrew Lamb, chief executive officer of CME Clearing Europe,
said in a January interview. “Yes, but based on tangible client
demand.”

To contact the reporter on this story:
Nandini Sukumar in London at
nsukumar@bloomberg.net or @NandiniSukumar on Twitter